Why Assigning Contracts Is One of the Worst Business Models for Real Estate Wholesalers

I’ve mentioned in other articles that in my nine years as a real estate investor, I have never assigned a contract. Well, that was true until a week ago, and boy, I will never make that mistake again!

Assigning contracts is honestly a stupid business model. I’m sorry to put it out there like that, but it’s true.

As a wholesaler, I want to officially lay out the contrast between what 99 percent of people do and what the top one percent does when it comes to wholesaling real estate. And after today, if you’re a wholesaler, I don’t want you to EVER do the former again!

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The Story Behind My First Assignment

There was a property that had some pretty interesting things going wrong, and I really didn’t want to deal with it anymore.

The seller was a little sketched out and had backed out twice already (and then came back and wanted to proceed), and I was just kind of done.

So I decided I’d assign the contract, even though my original intent was to follow through with the purchase. But as things progressed, it was really clear it wasn’t something I wanted to close.

I approached an investor buyer who I’ve worked with before and who lives in my state. I thought assigning the contract would all go fine, but then closing day came, and the money hadn’t been wired to the title company.

I had told the seller that we would close on Friday, and so she shows up and doesn’t get a check!

Who do you think got yelled at because of the actions of this investor-buyer?

Now, don’t get me wrong. I work with this end buyer a lot, and he has always come through on deals, but because of some issues with the wiring process, the money didn’t get to the title company in time for closing.

Whose reputation was on the line, though?

It was me and my company.

You see, assigning contracts is just as if you were to tell your girlfriend you want to marry her and on the wedding day, she finds out you got paid to hand her off to some other guy.

What Are the Alternatives?

When it comes to wholesaling real estate, a lot of newbies don’t even know that alternatives to assigning contracts are available.

I want to take some time to outline these different alternatives and then open the hood of my business and let you know what I do.

So with that, let’s begin with what assigning a contract actually means:

Assignment: When you get a property under a purchase agreement between yourself and the seller and then go find an investor buyer to whom you sell the contract for a fee.

Double Closing: When you get a property under a purchase agreement between yourself and the seller and then actually close and within the same day, resell it to an investor-buyer.

Closing and Then Reselling Later: When you get a property under a purchase agreement between yourself and the seller and then actually close. Then once it’s yours, you market it and resell it as-is.

Whole-tailing: When you get a property under a purchase agreement between yourself and the seller and then actually close. Then once it’s yours, you do minor repairs and clean up, market it and resell it as-is.

Why Assignment is the Worst Option of the Four

The truth is it’s because the assignment of a real estate contract the way most wholesalers do it is illegal.

Now, I’m not a lawyer, but feel free to check out this incredible interview of someone who clearly demonstrates why wholesaling (again, the way most do it) breaks real estate and contract law.

Disclaimer: This interview is state specific, and I do not benefit in any way from you watching this interview, nor do I have any affiliate relations with the website associated with them.

You cannot enter into a purchase agreement without the honest intent to purchase the stated property!

After you watch the video, it’s pretty clear that if you’re “tying up a property” with the sole intent to sell the contract to another investor, you’re straight up violating the law.

Additionally, it’s a horrible business model to base everything on this type of wholesaling strategy, even beyond the legalities of it.

When you assign a contract, you’re forfeiting your control. When it came to my situation with the property last week, I was left looking like a scam artist, all because this other investor was irresponsible.

Now, to his benefit, the funds did end up coming in, she got her check and everything ended up working out the following Monday — but what if it hadn’t?

What if this guy just randomly decided to back out?

All it takes is the seller (who got my direct mail) to tell her friends that I’m a fraud, who will then in turn tell their friends and so on, and the reputation of my business would end up in shambles!

Your reputation is EVERYTHING in this business, and I can’t afford to have it dependent upon the actions of others.

Another thing is that when you assign a contract, you have to disclose to the investor-buyer how much you’re making on the transaction.

If you got a grand-slam deal, say, a property with an ARV of $100,000 for $20,000, only needing cosmetic repairs of $10,000, and you sell the contract for a fee of $15,000, even though there is plenty enough spread for the buyer (he’d be getting it for $30,000, plus $10,000 rehab, meaning his profit would be $50K+), he might think you are a chump for trying to make a $15,000 wholesale fee. Or he might not, but you at least are taking that risk.

Every investor has an amount that they deem appropriate for wholesalers to charge in this type of transaction. A lot of the investors I’ve talked to say they hate working with wholesalers because they rip them off and charge them too much.

If you don’t assign, you never have to worry about this!

There is no reason you have to disclose the amount you purchased the property for otherwise.

Our Business Model and Our Strategy

We utilize the strategy of “closing and reselling later” because, for one, this is the real definition of wholesaling.

Any industry outside of real estate considers the selling of products to businesses for retail purposes to be the very definition of wholesaling. Look it up on dictionary.com if you don’t believe me!

We buy our properties at steep discounts, then resell them to other businesses (investors) at a slightly higher fee than what we purchased them for, and then the buyers use our properties to make money.

Sounds like the conventional definition for wholesaling to me!

Another reason we actually close and then resell later is because I just think it’s a cleaner process. No one will question the legalities of me selling my own house. No one will question how much money I make on the transaction because they won’t know. I don’t have to worry about asking to show the property, marketing, nothing! It just becomes a very simple and clean transaction this way.

Also, I think doing business this way is simply more honest. If I tell someone and enter into a legal contract with them saying I’m going to buy their house, I’m going to actually purchase their house.

It’s just the right thing to do, man!

Beyond that, if you base your entire business solely on the assigning of contracts, you heavily limit the type of properties you can make money on. Have you ever tried to assign the contract on an REO or HUD property? You can’t do it!

Now, at this point there may be some questions that arise like, “Don’t you make less money doing it this way because of closing costs?” The answer is yes, in the short term.

But wouldn’t you rather have a business that people can trust? Don’t you think that long term if people know you follow through with what you say, that you’ll get more repeat buyers and sellers?

Don’t you think if things actually happen the way they should ethically and morally that the sustainability of your business will be as solid as a rock?

I do, and it’s worked for me for close to a decade now.

But What if I Don’t Have the Money to Close With This Strategy?

Well, not to burst your bubble, but maybe you shouldn’t buy the property then.

I don’t want to harp on this too much, but there is a really weird mindset out there today that is so hyper “wannabe-savvy” that we forget that success takes a lot of hard work to accomplish.

I did my first deal on $5,000 and then worked my butt off being a full-time wholesaler and full-time employee for an entire year.

I saved up working capital (like you should with any business), and then once I had enough coming in to take care of my needs, I jumped in full-time.

Now, that’s not sexy, but it works.

Another thing you can do is partner with someone. If you have $5,000 and a friend or relative has another $5,000, then boom. You now have $10,000 to start with.

Yes, you’ll have to split profits, but a piece of the pie is better than none at all.

Once you have a little bit of a track record, you can also reach out to private money lenders. That has come in handy for me over the years, when my capital has been tied up in other properties.

I’d offer a private lender something to the effect of 2% of their money in 30 days, or they can begin charging 15-20% interest until they are paid in full. Do you think a private lender would like to make 2% on their money in 30 days or less? I know some who love it!

It normally works out well for the both of us, and again, that’s because I follow through with what I say I’m going to do.

So with that, I think we’ll wrap up.

My biggest point in all this is that we need to step it up as an industry. Wholesalers, for too long we have been dubbed the scum of the earth, and it’s because we do things like assigning contracts. Let’s get out of the grey and keep things black and white. Deal?

Investors: What do YOU think? Should wholesalers stop assigning contracts? Why or why not?

Leave your comments below!

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About Author

Brett Snodgrass is a licensed real estate broker and wholesaler who hails from the Indianapolis metro. His mission in life is to glorify God by serving as many people as he can through his real estate business. He has a pretty active community growing on Facebook and is also the founder of SimpleWholesaling.com Come check it out now and connect!

I now consider the individual that brought me that assigned contract one of my best investments…and worth every penny of the wholesale mark up.

Assignment is a tool in contract law…I had several RE lawyer consultations before buying that first property through an assignment contract. One talked my ear off about erroneous highly unlikely scenarios, HOURS OF TALKING. So that lawyer talked herself right out of a job. Two other prominent RE lawyers in Philly promised to send engagements letters to review the contracts and never did…On follow up it was apparent they never intended to do so. So do you stop investing because some idiots say not to do it…and cry Henny Penny the sky is falling!!!

I knew what the previous owner paid for the property before I agreed to the contracted deal with earnest money…I paid for and looked up the historical records of the property online, like you can in most any municipality. So, this comfort of not having to tell the buyer what you bought it for doesn’t wash…because I would know already.

So, I went and bought the property without the lawyers or a Realtor, a or broker and closed without them because of the guy that brought me the property, my Wholesaler. 3 months later after full renovations to the property, which my wholesaler oversaw, the reappraisal net a 20% appreciation. But I held it for the rental and longer term hold and have maintained a renter returning after expenses about 9% annually.

I admire your commitment to your reputation but utilizing assignment contract in wholesaling RE aren’t going to affect that. The wholesalers honesty, actions, conduct and transparency are what does.

All that said, if assignments aren’t what you feel comfortable with then it isn’t a good way for you to do business.

I was going to reply but you pretty much nailed everything I wanted to say, not sure where this guy got any of his info, sounds more like a lot of opinion and I am tired of opinion pieces.And yeah it is the same here you can find purchase price to every property here in Michigan and I guarantee every cash buyer doing their due diligence would find that info out.

I didn’t say that buying assigned contracts was a bad investment. I said being the guy who is assigning the contracts was a bad business model.

I have wholesalers sell me their contracts all the time, I just don’t do it myself because of the reasons I mentioned above, and if I was mentoring someone, I’d tell them not to do it either.

Assigning contracts, if done in the correct way, i.e. you had the original intent to go through with the purchase, but as you did your due diligence, certain things sprang up that discouraged your interest, and then you had someone who is interested even though you’re not, assigning is a great and legal exit strategy.

But if you structure an entire business on it, obviously your intent isn’t to actually purchase the property and could be considered illegal.

I am new to Real Estate, and there were two articles i read on this site about Wholesales not being right. It did discouraged me from taking this route into Real Estate, but I see your point of view as an investor, where the transparency of the Whole seller is what you trusted. Thank you for your feedback.

Robert I agree 100%. There’s a key point that was left out of this entire article – TRANSPARENCY. As a wholesaler, the seller knows (because of the “and/or” in the contract and me explaining my end game to them) that I’m going to make money. The buyer knows I’m a wholesaler and that I’m going to make money and usually both ends know how much I’m going to make.

Yes I can see people getting frustrated if you are acting like you’re trying to hide things from them but if you’re straight up with people than they are usually, 99.9% of the time, cool with you making money. They don’t expect us to do this for free or for pennies.

Yes, wholesalers get a bad rap but it’s not because they’re making $5,000 on a deal it’s because they’re trying to make $20,000 on a house that’s being sold to them for $20,000 and they’re trying to do some sneaky stuff to hide that from both sides.

I totally disagree with this article. Assigning a contract is a great way for a rehabber or developer to gain extra income while waiting on the larger projects and payouts to be completed. It requires virtually no money down which allows for newer investors or those strapped for cash to gain income. With any real estate transaction your reputation is on the line, so you better prequalify anyone you do business with, especially in this scenario. There is so much more I could say about this subject, but I will spare everyone the rant.

Come on Brett, comparing assigning a contract to dealing meth? Where I live, in the Bay Area, assignments are done ALL of the time. Why, because it costs hundreds of thousands to millions of dollars to purchase real estate. The numbers you provide in just aren’t attainable here. You can’t just have $5000 and find a buddy who also has $5000 and buy a house. $10,000 wouldn’t even cover the permitting fees.

We put in the purchase agreement, Buyer: ABC LLC and/or assigns, so everything is transparent or on our addendums in private sales stating we have the right to assign the contract. So no, I do not think this is dishonest. I guess we will have to disagree on this one.

Wow. Gotta love those absolutes people are so fond of throwing out there.

You know. When I bought my very first house, a primary residence, closing was delayed twice, because the seller hadn’t gotten everything done on their side. The first time, I showed up at the title company and found out after I was there. They just wanted me to go ahead and sign my stuff…blah blah blah…not going to happen. Closings can be delayed for any number of reasons. My situation didn’t even involve an investor. It was just Jim & Jane Smith not having their crap together, and the title company not finding out about it in advance. Having spent 20 years in banking, I can think of about 10 reasons the wire was delayed that wouldn’t have anything to do with anything your investor buyer did wrong. Banks screw up as well.

I’m not saying assignment is the way to go or even the best way to go. I am saying, in states where it clearly isn’t illegal, it is a VIABLE way to go. Contract law in Texas states that ANY contract is assignable, unless the contract contains specific language restricting assignment, as with HUD contracts.

I’m also not saying assignment should be used to obfuscate the true intentions of the investor. I assign contracts. However, I also tell the homeowners, at the first meeting, that I’m an investor. I explain our process and our business model, including the fact that we sometimes pass the deal on to other investors, if it doesn’t exactly fit our model for a flip. I write the contract showing “or as assigns” in the seller’s identity, even though it isn’t required in Texas. Why? Because I want to remind them we may pass this deal on to another investor. Then, if we do decide the deal isn’t a good fit for us as a flip – and there may be any number of reasons – and decide to wholesale it to another investor, I personally call the sell. I explain to them that we have indeed passed the deal to another investor. I provide an introduction and share contact information. I also give them my personal guarantee that I am still there for them, should they have any questions or issues. I give the same guarantee to my investor buyer, should they have any issues with the sellers.

No one has been unhappy. No one has felt as though they were misled in the process.

It’s unfair to throw gauntlets like this down as fact, when they are simply personal opinions and beliefs, regardless of how strongly held they may be.

Thanks so much for commenting. I agree that a lot of things can go wrong when it comes to the wire, and in no way did I want to paint the investor-buyer in a bad light.

And if you’re operating with full disclosure to all parties involved, I would 100% agree that your ethics are in the right place.

However, I still don’t feel comfortable with assigning, even with full disclosure because I think it makes you extremely liable if something goes wrong.

Again, you’re totally doing right by the sellers in the way you’re doing it, but if something goes wrong and they sue you, do you think it will stand in court? I don’t know, but I’m not willing to take that chance.

In terms of contract law, even in Ohio (where the video I shared above was taken) the law states that any contract is assignable unless the contract contains specific language restricting assignment. The thing is though, is if you enter into a purchase agreement without the intent to purchase, even if you have disclosures saying your intent is to assign the contract, there is a case to say you never had a valid contract to begin with.

Have you ever heard of someone being sued because of an assignment? What was the result? I can’t really see a judge saying “you have to buy this house or else”. There is risk in all types of transactions but this is sounds like a lot of hype to generate views on your blog post. Assignments, just like any other legal transaction, can be done properly, ethically and morally, or they can be done unethically and immorally. That doesn’t mean you should make blanket statements about them being a horrible vehicle.

Assignment of Contract real estate deals have been going on for decades, this is nothing new. I’m sorry you had this awful experience but one irresponsible end buyer doesn’t make assigning real estate contracts the worst way for wholesale real estate investors to do business.

I normally really like Brett’s articles. I found myself becoming annoyed while reading this one. He appears to be promoting buying and reselling as the method of choice when closing. However not everyone can afford to buy and resell. So assigning or double closing means I’m not striving to build a legitimate business and reputation? And then I’m a “wannabe-savvy” wholesaler that “forgets that success takes a lot of hard work”? Really? I guess I should just “slither” back into a dark ally, where I normally do business, because I can’t afford to buy and resell a house? Assignment of contracts is illegal?! So I’m a criminal too??

I’m so sorry to have annoyed you this time ’round! That’s never my intention and I hope you can forgive me.

I don’t see double closing as an issue either, and I’m sorry if it came across as otherwise.

You definitely don’t have to “slither,” back into a dark alley lol!

I am, however, 100% promoting buying and reselling as the method of choice when I close.

In the article above I did mention that if affording it is an issue, partnering or using private money can be a great option.

And what I was addressing when I said success takes a lot of hard work, is a common mindset I see, that always looks for the “Make money with nothing out of pocket -without ever having to put anything in it to make it happen!” And obviously, that’s not you.

I have found that it takes money to make money, and I was trying to encourage people not to be afraid of doing a crappy job that they hate for a time, if that crappy job can make their dreams (like investing full time) a reality, in a much more clean and simple way.

Risk mitigation is important in real estate and assigning does that. I cross off a clause in the contract saying the seller cannot force me to perform so that if I’m not able to close all I lose is earnest money which I’ve done for as little as $20. Reputation is important but for most guys new to the game that haven’t established a brand a deal I don’t see the risk of not closing as a viable concern. Obviously you only agree to a price where you expect to make money, but contracts fall through whether through investors or retail buyers.
The other thing that’s good about assigning is it frees up capital for flips or rentals where my money can be used better. I want money available for assets that fit my business model. If you have unlimited private funds and it’s a volume game then sure buy and sell, but that’s an entirely different business model at different stages in the investing career. If I can buy and hold every house I can find I would but I’m not at that point yet.

I’m not saying there aren’t benefits to assigning contracts, I’m just saying that the risks, for me, outweigh the benefits.

If watch the video I cited above, there is a case that even if you disclose or have a clause that shows your intent may not be to follow through with the purchase of the property, it may not be held as a valid contract.

Obviously, assigning contracts is legal if done right but the way most wholesalers do it, isn’t.

Again, it’s a grey area but it’s not a business model I’d want to base my bet on.

When they ask how much are you making
just say please don’t count my money
that’s my wife’s job.lol

One thing i do when i assign is i always get a larger deposit then i put down.
So when they start to do the “curly shuffle “.I say unfortunately the time
to negotiate was before you signed the contract.At this point its sign or
don’t sign but if you don’t your going to loose your money.
Never be afraid to stand strong ..

Where I wholesale, buyers don’t care what the wholesale fee, as long as the deal makes sense to them at the number on the contract. Like someone mentioned, you can find the historical price of houses/property either on the state or county website. Even Zillow & Redfin will give you a historical purchase price of most properties. Even when I JV on wholesale deals, I look that info up so that I’ll know if the offer price will make sense to my buyers.

I understand your sentiment, especially with what happened with the title company, but I disagree that it is the worst way to do a deal, …. unless it becomes illegal in my area. By the way, I do tell the seller that I will be assigning the contract to one of my partners who will close on the deal.

Thanks for the comments James, and it seems that since you are disclosing to all parties, you are trying to do it right. As I always say, everyone has an opinion and this article was just based on mine. If you ask 10 Real Investors about this strategy, you might get a bunch of different answers. I just believe that the strategy of “Assigning Contracts” is a GRAY Area. I enjoy working in Black & White. I know that you you can assign 1 contract and be ok, or 10 contracts and be great, or 50 and do well. But if you plan to be a Legitimate Wholesaler for the next 5 years or 10 or 20 years, and base your entire business model around this strategy . . . Not only will it limit you (As mentioned in the Article), but I believe as this strategy become more Popular and more utilized, We will be be seeing more Video’s like the one in the Article cracking down on this method. Maybe I’m wrong . . . It will be interesting to see… Thanks for the comments.

Brett I’m sorry, but articles like this that are laced with “Me”, “I”, ” in my opinion” are typically written by the uninformed. As a fellow broker I would caution you in publishing articles where it appears your giving legal advice, and incorrect advice to boot. Your brokers license does not permit you to give legal advice. That is Broker 101. The only take away I got from your article was to remind myself that there are plenty of people in this space that don’t know what they are doing. For that much needed reminder, I thank you. Enough said.

Excellent article Brett! I wish this type of advice was around 10 years ago when I tried assigning contracts..You’re correct, many people are doing it illegally, it’s not easy and it’s not a viable way to have steady cash flow..
Regarding Fred’s comment, I’m not sure where a deposit comes into play…that’s a first I’ve heard of..

Anywhoo, keep up the great work and thanks for justifying what I thought was true at the time although I couldn’t bring myself to admit it..

Thank you for the Blog Post. This given me a different perspective. I now have some new things to think about, as well as look into and consult my attorney about. Thank you for the informative article and assisting me in continuing to learn and grow me real estate knowledge.

There are a lot of differing opinions on wholesaling. But I can really appreciate your mission in life to glorify God. This is a mission that I have in life and business. Your take on wholesaling is something I’ve fought with many times over. I guess that is why I’m a flipper and not a wholesaler. But I can’t say that I won’t do any wholesale deals in the future. Thanks for your article.

You are crying about ups and downs in the wholesaling business.there are problems in every business model in real estate.Thanks ! Leave wholesaling to the ones that can handle the problems and you stay in your lane.I say this ,because I don’t want you to strike fear into the newbies.They don’t have financing or maybe they cant double close due to liens. Its their only way to begin. Wholesaling is the best model for Newbies.

Brett, I get what you are saying. Although I am primarily a landlord, I have bought several wholesale properties via assignment and I have wholesaled properties I could not pass up but did not fit into my long term plans. When I have wholesaled I followed your “whole-tailing” model. Unfortunately there are lots of would be wholesalers that tarnish the industry by promising to buy someone’s property when they do not have the means to do so. Many people are strung along and used when the “wholesaler” cannot find an investor.
There is nothing wrong with using assignments however you should be prepared to closing the transaction whether you find an investor/buyer or not, that is the ethical point I think you are making. An assignment contract without any intent to close yourself is like asking for a free option to purchase but not telling the Seller your true intent.

Thanks, I’ve read the article, Watched the Videos, and I feel that I see where you are coming from with this.

I agree that as a “Business Model”, as in if your whole goal in your business life is to assign contracts for profit, then yes, your business is like a house built on shifting sands from the viewpoint of the Regulators of Law. Though In the videos provided, while I feel it was very unbalanced, as I’m sure there are Pro-Assignment Regulators in existence, but in the end it was very informative and I liked the opportunity from seeing it from their side and yours.

Now In my opinion as a Realtor, many people’s view on “Ethics” in Real estate are very skewed, largely basing how Sellers feel as the ultimate measure of what’s right. I mean, out of the years real estate has been in practice, Buyers Brokerage and Buyers Representation literally just started in the early 1990’s and it still has a way to go in evening out the playing field.

Virtually Everything is seller sided if things aren’t to their liking even if they agreed in writing;
-If you don’t have a license, if things go sideways wholesaling, you can get penalized for not having one.
-If you do have a license, if things go sideways wholesaling, you can get penalized for misrepresentation, acting as a dual agent or a net listing should those be illegal in your state.
-Even the act of closing and then reselling for a greater price as is, if the seller looks at you sideways, would go after you for not dealing openly and honestly with all parties as required by licensees, and make you liable.

My point is that I think it’s time to stop treating Sellers as Delicate Naive Children being taken advantage of by the big bad Investor Buyer. Lets treat both sides as inform-able, responsible, consenting adults.
For Assignment deals, If all parties used full disclosure in a option agreement that doesn’t restrict the Seller from selling on their own, if all parties agreed to terms that does not take advantage or mistreat another as deemed by an attorney, and it is found helping to achieve a mutual goal of selling the house while the Seller nets a payment they deem satisfying.
The rest falls on being a mature sound-minded Seller following through on the agreed assignment deal, whether it closes or not. I believe that is the right way of doing this.
All the fluff and extra of being politically correct by “having the true Intent to buy for yourself” is unnecessary.

I have always purchased my wholesale properties outright so avoid just these kinds of complications. I don’t want my reputation to be dependent on someone else’s performance (or lack thereof). I have colleagues who assign and it seems to work for them, but I have shied away from it. Maybe I’m just a control freak? But I must say the idea of avoiding closing costs is very appealing. I think I would only be comfortable assigning a purchase contract that I intended on closing on anyway, which would avoid a lot of the issues stated here.

This is an interesting position and even more interesting debate. I did my wholesaling by assigning the contract. But that was only because I could not find a title company that would do a double close!

That said, what is the hesitation to do a double close? Is this against any law? And do you all know any title companies in my area (MD, DC, VA) that do the double close?

I disagree with the premise of the article and the examples used to support it. Your bad experience was not the result of inherent problems with assigning a contract; it was the result of failing to manage the situation. Why didn’t you verify that everything was in place before allowing the seller to get to closing?

And assigning a contract is in no way like giving your new bride to another man. If the seller is surprised that you are looking to profit from the transaction, you have not set expectations properly. When I work with sellers, I repeatedly tell them that I intend to make a profit off the transaction. I also tell them that I don’t know what my end strategy for the property will be. I tell them that I may flip it, I may rent it, or I may assign my contract to someone else. In addition to those discussions, I let them know in writing. That way there are no surprises and no hard feelings.

And why would your buyer be angry at you for making a profit? If you provide value and the purchase is a good deal for the buyer, why should s/he care about how much money you make on the deal? Again, this is a matter of managing expectations. I buy from wholesalers. Frankly, I want them to make enough profit to keep them in business so they keep feeding me deals. I appreciate the value they bring to my business. If they bring me a deal that provides value to me and they make a big profit, more power to them. The amount of profit they make on a deal is none of my business. The amount of profit I make on the deal is my business. If the deal is not a good value, I’ll simply pass on it.

Your strategy of closing first and then reselling the property is fine; I’ve done that myself. However, if you sell the property within a year of closing, you will pay short-term capital gains. People should be aware of that.

Whether wholesaling or engaging in any other kind of business, you need systems, processes, and good communication. You’re blaming the other investor for being irresponsible. Was he? Maybe. But he wasn’t the only one. If you had managed the process and the communication, you and the seller would have had advance notice that things were not coming together. You can reduce the chance of the buyer backing out by collecting a non-refundable deposit.

Honestly, I think your problems with this particular transaction were the result of not using good processes, systems, and communication. I’d hate to have your readers shy away from assigning a contract as a viable business based on your experience.

I agree completely with you Rob. If the purchase contract is structured properly, there’s absolutely nothing wrong with an assignment. It is important to properly manage the expectations of everyone involved. We purchase contracts on assignment frequently. The fact here is that you are not selling a property. You are selling a contract. You are marketing a contract to buy discounted real estate, not marketing a property you don’t own. The asset involved in the transaction, whether real estate or a banana, will need to be inspected by the individual or entity that plans to use it as a basis for the value of your contract. If you manage the transaction this way, you will not have these problems.

I agree that assignment of contract is risky. Besides not being able to close, you also risk the buyer not paying you. How do you go to court and defend your fee? The amount of your fee minus the work that you performed ; would not stand up in court. Assignment is good because it pays but not as a business model.

I read the blog, and it shed some light on the assignment of contracts, that I didn’t think of before. I have been interested in breaking into REI for over three years now. I have heard quite a bit on this subject. I believed this (assignment of a contract) WAS wholesaling. I also believed from what I have read, was the first step in REI. One would follow this model, save for a downpayment on a rental home, then repeat. After reading some bigger pockets blogs, and from one of your contributors I am emailing back and forth as of the last few days, Wholesaling is not the way to begin one’s journey in REI.

I’m new. So I’ll just get that out there now. My mom, when she was alive, worked for a real estate attorney and title company. She was also a realtor toward the end of her life. And this was her position on the legality of assignments. It’s a double edged sword and it depends on which law you look at (west virginia) Assigning a contract is legal as far as contract law goes. And is fine as a back up plan. But… according to the real estate comission, if you market a property to sell, that you have not closed on , you are engaging in brokering without a liscense. So my thought, at least in my state, is to close on it first. Even if it’s a double close, Your protected from legal ramifications that way. Otherwise, you just may get hit with a fine from the real estate commision.

Well, Brett-
You certainly did bump into a hive of hornets here! We had this same discussion recently at our REIA networking group, after a day of presentation by Jeff Watson, Esquire- the attorney who conducted the video posted here- and after 20 minutes of heated debate, someone summed it all up….”Ah yes, clear as mud!”

By the way, Mr. Watson would definitely side with you on this issue, as state regulators become more aware of how we pass around contracts on a frequent basis. Assignors beware!

Some of these comments are unnecessarily nasty, and I must congratulate you for giving us great food for thought. Stay brave, and give us more- don’t let the naysayers dampen your spirit. You have great ideas, and lots of ethics, and your post is obviously very useful to many– All good in our business of real estate transactions!

I don’t understand why buying the property first then reselling later would somehow hide the price of your purchase. Just about every real estate website and the MLS make it very easy to see the sale price history of the property. Seems like a flawed argument to me.

Disclosing to the seller that you’re gonna assign the contract for a fee seems like the best way to go about it..If the seller’s asking price is sufficient enough for the assignor and assignee to make a profit, then there should be nothing to be worried about…Once the contract is assigned, if the assignee can’t perform, then it’s on him/her. Vincent Polisi has a really good podcast on this

Good advice… don’t know that many jumping into the wholesaling arena will follow it.. but your business model seperates the real Real Estate professional from the wanna bee’s who just flame out anyway.

good stuff again. A person can make more money buying the discounted property then selling it for a profit. A guy named Mark Evans DM is close to 7 figures using this model and or the buying, fixing and selling to end investors.

Ok, Being day 4 of my Wholesale Adventure, this article and the comments scare the shit out of me. I agree with, not being dishonest, and being up front in the expectations with the seller, so they know how the process works, but even then, the seller has to come through as promised. If not, I get that I am the middle man and will take the heat, but Illegal? My understanding it’s a valid contract, Everyone knows what’s happening, and it’s cleared through legal means. What’s the problem? Is this a Panic Article, Opinion, are the responses valid as well, .. HEY, I NEED A MENTOR HERE IN CALIFORNIA ASAP PLEASE!!!!

I am planning on getting into the wholesale business as well. I am looking for someone that is doing the same in my area. I live in PA and just really want to pick someone’s brain who is already doing it. Thanks !!

Here is my take on this blog piece, as this is the second piece I’ve read seemingly demeaning “assignment contracts”:

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But What if I Don’t Have the Money to Close With This Strategy?

Well, not to burst your bubble, but maybe you shouldn’t buy the property then.
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Untrue! To me, this business is about creative financing or coming up with ways to solve problems. Just because you don’t have the money doesn’t mean that your out of luck. This, to me, just feels like discouraging individuals from pursuing the business. My question is, what is the motivation for such a comment?

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If you got a grand-slam deal, say, a property with an ARV of $100,000 for $20,000, only needing cosmetic repairs of $10,000, and you sell the contract for a fee of $15,000, even though there is plenty enough spread for the buyer (he’d be getting it for $30,000, plus $10,000 rehab, meaning his profit would be $50K+), he might think you are a chump for trying to make a $15,000 wholesale fee. Or he might not, but you at least are taking that risk.
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After you watch the video, it’s pretty clear that if you’re “tying up a property” with the sole intent to sell the contract to another investor, you’re straight up violating the law.

Additionally, it’s a horrible business model to base everything on this type of wholesaling strategy, even beyond the legalities of it.
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Back to what I said, it’s about helping the seller get out of a problem or resolving an issue. What is immoral about assisting the seller? Would it be immoral for a real estate agent to broker the sale of a home and take a commission?

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When you assign a contract, you’re forfeiting your control. When it came to my situation with the property last week, I was left looking like a scam artist, all because this other investor was irresponsible.
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You also made a comment that you promised the seller to close on Friday. No pun intended, but how is it irresponsible of the buyer? Number one principle in sales, under-promise and over-deliver. Seems here that this transaction was over-promised and under-delivered. Granted the funds made it on Monday, there was a communication breakdown somewhere, which unfortunate, it happens.

And that’s why it’s smart to have multiple investors so, if one should back out, you have another to take the place of the one investor. Of course, it could come an unfortunate event where you’re left hanging, in which case, ask yourself how creative you can get to fulfill the deal. At $20k, for the inconvenience, offer a little more to the seller, get a HML to purchase, fix up the property, and sell it yourself on the market for $100k. Even with a high markup of the HML interest rate, you’ll likely still profit. And even if by a slim margin, your reputation isn’t on the line. This could be easier than assigning, but takes time, in which is a valuable commodity in itself.

It seems to me that the main complaint with assigning contracts is *not* illegality…but rather the [lack of] transparency of the wholesaler.

As in, if you go into the deal with every intention to assign the contract, and you tell the seller that you intend to assign the contract, and you include a very clear clause in your contract that you sign with the seller that you may assign the contract to another buyer… Then there shouldn’t be any problems at all.

I can see where a buyer might be upset if YOU promise to buy their house and then back out last minute. But that doesn’t indicate an issue with the concept, that indicates an issue with YOU in the fact that you were not honest with the homeowner and clear about your intentions.

Wow this is very interesting, being I’m new to the Real Estate game. But I feel that as long as you disclose everything that your doing with everyone involve then what is the problem. Legal, Illegal what’s the difference as long as the seller is in a better position then when we started that is what this is all about. Integrity, honesty and good business practice and solid people on your team you shouldn’t have a problem, but something can always go wrong doesn’t mean it wasn’t done right. I’ll always keep the seller in mind when doing business because everyone else is making a profit and they are trying to resolve a issue to get on with there lives so don’t complicate anymore. JUST DO RIGHT BY THE SELLER AND ALL WILL BE WELL. IJS

Brett,
Excellent article, there was definitely something that I was not fully convinced about in the wholesaling process and it was about assigning a contract. Your article clarify things up big time for me. Assigning contracts not a good business model! … I get it! to the point that I’m changing my strategy to get started Real Estate.
Thanks! and keep up the good work.
Sergio.